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Derivatives industry body looks at rules for crypto disruptions

02:53, 15 December 2021

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ISDA says it looks to define crypto assets and provide guidance on pricing in the event of market disruption – Photo: Shutterstock

In a sign of the increasingly institutional nature of the crypto sector, an industry body representing wholesale players in the derivatives market such as banks and exchanges, is proposing a set of rules which will govern how to deal with “disruptions” to the digital asset market.

The volume of crypto derivatives regularly outstrips spot trades, with much of this growth coming from the institutional sector which is increasingly focusing on digital assets.  

The International Swaps and Derivatives Association (ISDA) has identified areas such as forks, where the underlying protocol governing crypto changes such as the recent Altair hard fork on ethereum or changes to regulations as potential events which could impact digital asset prices. 

Digital asset market worth $3trn

In a consultation document released yesterday, ISDA said it looked to define crypto assets and provide guidance on pricing in the event of market disruption. 

ISDA standards have governed the way that derivatives contracts are transacted and valued since a swap agreement between IBM and the World Bank in 1981 and the industry body said that it wants to provide a similar level of clarity to the crypto derivatives market. 

“From a market value of effectively zero a decade ago, the total value of all digital assets is today estimated to be approximately $3 trillion. This growth has been accompanied by a corresponding increase in the number and diversity of market participants,” ISDA said in its consultation paper.

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“Digital asset derivatives increase transparency and liquidity in the digital assets market by facilitating price discovery and allowing market participants to hedge risk. However, it is vital the growth of this market is based on firm foundations,” according to ISDA’s consultation paper. 

The body said that the creation of contractual standards is central to the development of a safe, efficient digital asset derivatives market. 

BTS/BTC

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Short position overnight fee 0.0140%
Overnight fee time 21:00 (UTC)
Spread 5.00

The US Securities and Exchange Commission recently greenlit two bitcoin exchange traded funds, with Bloomberg reporting at the time this was because the securities were based on the futures, not spot price. 

CME crypto volumes top $1bn daily

The ISDA document noted that volumes of bitcoin and ether futures on institutional focused exchange CME Group regularly exceeded $1bn a day and said that over-the-counter derivatives trading, typically private transactions between institutions, which are based on these daily prices would boost the underlying crypto market.

“To provide maximum benefit and flexibility to participants in digital asset markets, it will be vital that over-the-counter derivatives trading can continue to flourish. To do so, it must be built on firm foundations,” ISDA said. 

No more “dark and dingy spaces”

The increasingly institutional nature of the crypto markets was recognised by the CEO and founder of utility token provider, enVoy, Lee Tarone, in a recent interview with Capital.com.

Tarone said that while the sector had started in “dark and dingy spaces”, its current iteration now has a more corporate face. 

“The crypto market is maturing, with institutions coming in and dominating the sector. It’s no longer just a bunch of people in their rooms, it now includes major institutions like Nasdaq,” he said.  

Read more: enVoy to close the Read more: enVoy to close the $1.7trn trade finance gap with crypto.7trn trade finance gap with crypto

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